HNI Corp (HNI) 2014 Q3 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation third-quarter fiscal 2014 results conference call. (Operator Instructions). As a reminder, today's conference call is being recorded.

Thank you. Mr. Matt McGough, you may begin your conference.

Thank you. Good morning. I am Matthew McGough, Vice President Corporate Finance. Thank you for joining us for the HNI Corporation conference call to discuss the third quarter fiscal 2014 results announced yesterday after market close. Copies of our financial, news release and earnings presentation including non-GAAP reconciliations have been posted to our website, www.HNIcorp.com.

Joining me today from HNI Corporation are Stan Askren, Chairman, President and CEO, and Kurt Tjaden, Vice President and CFO.

Statements made during this call that are not strictly historical facts are forward-looking statements. Forward-looking statements are subject to known and unknown risk. Actual results could differ materially from expected results. The earnings presentation posted on the HNI website includes additional factors that could affect actual results. The Corporation assumes no obligation to update any forward-looking statements made during the call.

I am pleased to turn the call over to Stan Askren.

Good morning, everyone. We will share our assessment of third-quarter 2014, provide some thoughts on our outlook for fourth-quarter 2014, and then full-year 2015. Then at the end we will open the call up for questions.

In summary, it was another strong quarter. We delivered topline growth and strong profit improvement in both our office furniture and hearth businesses. We continued to deliver strong operating results while investing for long-term profitable growth.

Our hearth business continues to deliver outstanding performance. Operating profits increased 65% on 27% sales growth. Remodel/retrofit sales improved 38% led by a significant increase in biofuel product sales. Sales in the new construction channel remained strong with 13% growth. We delivered solid sales and profit growth in our office furniture businesses. Operating profits increased 17% on 5% sales growth. Sales were up 2% in our supplies driven business while sales in our remaining office furniture businesses was up 10%.

Overall I'm very pleased with our third-quarter results and the momentum that we are achieving heading into the fourth quarter.

With that, I will turn it over to Kurt Tjaden.

Thank you, Stan. So for the third quarter of 2014, consolidated net sales increased 8.7% to $615 million or 9% on an organic basis. Non-GAAP net income per diluted share improved 33% from the prior year quarter to $0.81 excluding restructuring and transition costs. Sales for the office furniture segment increased 4.8% to $489 million or 5.2% on an organic basis. Sales for the hearth products segment increased 26.7% to $126 million.

Non-GAAP consolidated gross margin improved to 36.4% compared to 35.3% in the prior-year quarter. Higher volume, increased price realization, and strong operational performance were partially offset by unfavorable mix in investments and operations. As a percentage of net sales, selling and administrative expenses decreased 0.2 percentage points due to higher volume which was partially offset by investments in strategic initiatives, higher incentive-based compensation and timing of expenses.

In connection with the office furniture consolidations, $4.9 million of restructuring and transition costs were recorded in the third quarter with $3.9 million included in cost of sales. As a reminder, for these actions we expect to save approximately $8 million annually beginning in 2015. Stan?

Thank you, Kurt. Looking forward, I am encouraged by the continued strong performance of our businesses. We expect another strong quarter to finish the year with solid sales growth and double-digit profit improvement. We expect the office furniture sales momentum to continue led by our contract business. Supplies driven business is improving at a lower rate due to a muted small business spending environment.

In our hearth business, we expect strong growth in the new construction channels as our brands are well positioned to continue to outperform the market. We project continued growth in our remodel/retrofit business driven by strong momentum in biofuel product sales.

After our third-quarter close, we completed the acquisition of Vermont Castings Group. VCG as we call it, is a great opportunity to create long-term shareholder value as part of our very successful hearth and home business. VCG's unique brands, strong customer relationships and quality products will strengthen our hearth strategy and our brand portfolio.

A few of the details regarding the VCG acquisition are as follows. Annual revenue is approximately $100 million. This was an all cash transaction. We paid approximately 7 times trailing 12-month EBITDA and earnings will add nominal profit to the Corporation in the fourth quarter 2014 and will positively contribute to 2015. We expect to deliver positive economic profit from this acquisition within two years. Kurt?

So the financial outlook for the fourth quarter 2014 and full-year 2015. For the fourth quarter 2014, we anticipate overall sales to be up 13% to 17% or up 8% to 12% on an organic basis. Office furniture sales are expected to be up 5% to 9%. Supplies driven furniture sales are expected to be flat to up 4%. Sales in our remaining office furniture businesses are expected to be up 11% to 15%. Hearth sales are expected to be up 38% to 42% or up 18% to 22% excluding the impact of the Vermont Castings Group.

Non-GAAP gross profit margin is expected to be slightly higher versus fourth-quarter 2013 when it was 35.7%. Non-GAAP SG&A as a percentage of sales is expected to be slightly lower versus fourth-quarter 2013 when it was 28.7%.

The effective tax rate for 2014 is projected to be approximately 35% and for the year we are expecting capital expenditures to be $90 million to $95 million. Free cash flow defined as operating cash flow minus CapEx and capitalized software is projected to be $70 million to $75 million for the full year.

So for the full-year 2014, we are raising our projected non-GAAP earnings per diluted share to be in the range of $1.95 to $2.00 per share. This includes our estimated fourth-quarter non-GAAP earnings per diluted share forecast of $0.63 to $0.68 per share.

So looking to 2015, our current best estimate of full-year non-GAAP earnings per diluted share is in the range of $2.40 to $2.65. This strong profit improvement across our businesses will be driven by continued topline growth, operational improvements and benefits from strategic investments.

For our office furniture segment for 2015, we expect mid single-digit organic sales growth led by our contract business and an improving North American economy. Including the impact of Vermont Castings Group, our hearth business is expected to grow sales in the midteens in 2015 driven by continued strength in the new construction channel. We expect remodel/retrofit channel growth will be moderated due to strong comparables on bio product fuel sales. Stan?

Okay. I will conclude here. I remain confident in our strategies to drive significant profit improvement while simultaneously investing for long-term profitable growth. We enter the fourth quarter with strong momentum across our businesses and we remain on track to grow sales and significantly increase profits in 2014 and 2015.

With those comments complete, we will now open it up for questions.

(Operator Instructions). Josh Borstein, Longbow Research.

Thanks for taking my questions here. Congrats on a well executed quarter. Can you talk a little bit about the order trends in both contract and supplies and just how the quarter played out whether you saw any acceleration or deceleration throughout the quarter?

Yes, Josh, I would say there was increasing, I think it accelerated during the quarter, not in a huge way but certainly we exit with stronger momentum than we entered the quarter in both contract -- I would also say supplies as well. In particular the project business is very, very strong. The day-to-day is increasing, the supplies business is increasing but at a lower rate.

Okay, great. Last quarter you had expressed the opinion that office furniture is in for a slow steady consistent growth until the economy decides to kick into another gear. Is that still your outlook?

Yes, it is. There are going to be periods where it is going to accelerate more than others but obviously we are coming off a strong third quarter and looking at a strong fourth quarter and so I believe until recent events that the economy was picking up and there is -- new construction is picking up, office is picking up, churn events are picking up in office furniture and we were starting to see acceleration. This last period in particular was strong, we think the rest of year will be strong but I think I'm holding to my comments from the last quarter.

Okay. And on the hearth side, you again just referring to last quarter, you mentioned capacity rates in hearth were running 60% to 65% with no imminent reasons for expansion. Does that imply you can absorb some of the demand from Vermont Castings with your current footprint?

Yes, I mean obviously that is all part of the consideration. Now I would tell you we acquired Vermont Castings in part they have got some good operations, some good businesses. We will go in and apply our lean process with them. I mean they basically -- we teach them, give them the tools and help consult them through that process and I think that is going to continue to free up additional capacity for even more growth as we go forward.

Okay. Do you have and earnings accretion estimate for Vermont Castings for maybe the rest of this year or 2015?

Yes, it is nominal for the rest of the year. It is going to be a couple of pennies would be our guess, Josh. Next year it is somewhere around $0.05 to $0.10, and we are still sorting a lot of that out but it is all positive. There is no drag that we foresee.

Okay, great. And then just one more for me. On the commodities side, seen any changes there? Obviously steel coming down but do you expect any margin benefit from falling commodities?

No, I would say we are seeing some moderate increase in commodities. It is all very manageable. A lot of it has to do with just supply changes, industry consolidations of some of the supply bases our around -- you see this stuff all the way around from particleboard to liner board, etc. So I think it is going to be a similar vein to this year, very manageable with maybe a slight uptick due to really supply changes more than demand.

Okay, great. I appreciate it. Congrats again on the quarter.

Thanks, Josh.

Matt McCall, BB&T Capital Markets.

Thank you. Good morning, everybody. So Kurt, I tried to write all the 2015 outlook. Could you briefly or quickly go through those numbers you gave for the outlook for 2015?

Sure. So earnings per share, non-GAAP $2.40 to $2.65. Mid single-digit organic sales growth in office furniture led by contract and then hearth business expected to grow sales in the midteens driven by new construction and some muting on growth on remodel/retrofit in the bioproducts segment of the business.

Okay. And I tried to plug in the model as we were going so that is implying kind of a high single-digit organic growth rate. You get the benefit of the topline from Vermont Castings and you also get the accretion Stan just spoke of. But if I just look at the numbers, it looks like the incremental margin that is baked into that is something in the midteens if my math is right. Why would you see such a step down in the incremental margin from the 25% to 30% that you have done over the last two years?

I think your math is probably -- we should look. Because I would say overall, we are probably if you take that combination it is closer to mid single-digit growth as opposed to high and if you took that at the midpoint of the guidance, Matt, you would be right back in that sweet spot of that 25% to 30% target leverage.

So that is your organic number plus the $0.05 to $0.10 from Vermont Castings?

Correct.

Okay. So if you are assuming contract leads in your mid single-digit are you expecting supplies to grow next year?

Yes, we have supplies. I think Kurt's guidance here or my guidance was supplies should be up mid-single digits as well.

Okay. Okay. Sorry, I missed that part.

Matt, looking at my notes here and to be fair, it is probably low single digits.

Yes, Matt, I would say more higher on contract, low single digits on supplies and that is how you kind of end up with that mid single-digit overall. Does that help?

Yes, it does. So if you look at the more recent trends and the outlook that you have for Q4, it seems like your contract business is doing a little bit better than the overall industry. I know sometimes it is apples and oranges but can you talk about if you are and if you do think that you are outperforming, what is driving that outperformance?

You know, Matt, where I am at on this is claiming outperformance on anything in this business in a quarter is a fool's errand. So we have good momentum, I would say that. What is working, we've got some really good big project wins. I think our contract businesses are performing well. Some of that is timing. You really have to look at this business around these things over the longer term or else you come up with all sorts of bad conclusions I think.

Okay. Final one, your corporate expense line was up quite a bit year-over-year if my model is correct about 25%. How do you want us to think about that near-term? How do we model that next year? What drove the increase on a year-over-year basis this quarter?

So we are up about $3 million I think for the quarter, Matt, $5 million year to date. You had three things going on. One, you've got the expense side of our business system transformation investment that we have talked about in prior calls. Second, given the strong performance, we have higher incentive-based compensation and as you know for us a big component of that is profit-sharing that we pay out to our members. And third is we have got some group medical that variance it rolls through the timing and things.

I would tell you as you look into the fourth quarter, part of that guidance on corporate unallocated I would expect it to be higher than full year than last year, probably a similar number that what you saw for third quarter but that should be included in that overall SG&A guidance that we gave you which as a percent of sales should be slightly lower.

Okay, yes. I see that.

Does that help?

Yes, it does. Just one more back to the incremental margin, so you said if I strip out Vermont Castings I'm going to get something in that mid-20% range. Is that before bringing in the projected savings, that $8 million of savings from the restructuring?

I think what I said and I will clarify is all in for next year if you take a mid single-digit sales increase and midpoint of guidance, you should get to a 25% to 30% leverage all in, Vermont Castings in, savings from the restructuring and all of our investments and other operational improvements.

Okay. I will go back and look at it again. Thank you, guys.

Todd Schwartzman, Sidoti & Company.

Good morning, guys. I wanted to ask about the strategic investments of the growth initiatives that clearly are helping for -- if you could discuss segment by segment, were these investments higher on a year-over-year basis? Are we seeing a little moderation there and do you take your foot off the pedal maybe a little bit going forward?

So we don't break it down segment by segment, Todd. I would say to you the strategic investments are running about the same as they were, not any big increase, not any big decrease. So no, we are not taking our foot off of the pedal. That will be ongoing. We still see similarly great opportunities to invest and create shareholder value both from a capital standpoint and also from a sort of expense standpoint.

Okay. And also if you haven't already, could you talk to the seasonality of Vermont Castings versus the rest of hearth and home technologies?

No, we are not prepared to do that. We don't break that out. I would say you should anticipate it should be consistent though with the overall hearth business. Whatever minor change or deviation difference there would be is really kind of lost in the overall mean.

Okay. And I know it is still early but any integration issues to speak of thus far?

No, I mean we have only had that business for a month and I will remind you we have a long history at heart of doing these deals and really driving that. It is a good business, it is not a broken business. The hearth team that we have is very experienced on this and so no issues yet and I don't think this is a big high risk sort of integration opportunity.

Finally, you said that both contract and supplies orders -- you have more momentum exiting the quarter than the early part of the quarter. Was there steady progress maybe month to month for the full quarter? I know that it is not ideal to take such a short-term view of things but if you can just kind of give a sense of the pace that would be helpful.

No, I don't think there is anything special to call out there, Todd, on month to month or anything else. I think it is just a general statement that it picked up during the quarter and I don't think there is any signal for the market or for you going forward that you should pick up from that.

And pacing, any different thus far in the first couple of weeks of Q4?

No.

Okay. Thanks a lot.

Thank you.

I will turn the call back over.

Thank you very much. So we appreciate everybody's interest in HNI and appreciate you dialing in and look forward to reporting our results in the future and look forward to talking to you soon. Thank you.

This concludes today's conference call. You may now disconnect.